Wednesday, July 5, 2017

Thailand holds rate, domestic demand not broad-based

Thailand's central bank left its monetary policy rate at 1.50 percent, as widely expected, and said its policy stance should remain accommodative as the expansion in domestic demand was not yet sufficiently broad-based although the overall growth outlook had improved due to better exports.
The Bank of Thailand (BOT), which has maintained its rate since April 2015, also said the recent fall in inflation was due to supply-side factors, such as lower fresh food prices from high output and lower energy prices, but inflation was still seen rising in the latter half of this year.
Thailand's headline inflation rate was a negative 0.05 percent in May and negative 0.04 percent in April and the BOT acknowledged that inflation would be below its the lower bound of its 1-4 percent target range in some periods.
Upward pressure on prices from demand also remains low, the BOT said, adding supply-side factors and a recovery of domestic demand should boost inflation during the second half of 2017.
Thailand's economy grew by an annual 3.3 percent in the first quarter of this year, up from 3.0 percent in the previous quarter, helped by a broad-based expansion in merchandise exports and a recovery in tourism.
Private consumption is also continuing to improve on higher farm income but overall non-farm income has not gained from the recovery in exports so "overall purchasing power had yet to fully recover," the BOT said.
Last month the International Monetary Fund raised its 2017 growth forecast for Thailand to 3.2 percent from 3 percent while the BOT has forecast 3.4 percent, up from 2016's 3.2 percent.
On the exchange rate of the baht, the monetary policy committee merely said that recent movements were in line with regional currencies.
The BOT has in recent months voiced its concern about the strength of the currency, which is trading around highs not seen since 2015. The baht fell sharply from the "taper tantrum" of April 2013 to September 2015 but since then it has been slowly appreciating, especially this year.
Today the baht was trading at 34.0 to the U.S. dollar, up 5.3 percent this year.

The Bank of Thailand issued the following statement:

"The Committee voted unanimously to maintain the policy rate at 1.50 percent.

In deliberating their policy decision, the Committee assessed that Thailand’s growth
outlook improved further due to a better export outlook while domestic demand continued
to expand at a gradual pace and not yet sufficiently broad-based. Headline inflation softened
and might fall below the lower bound of the target in some periods mainly due to supply-side
factors. Nevertheless, headline inflation was projected to rise in the latter half of this year.
Meanwhile, overall financial conditions remained accommodative and conducive to
economic growth. Hence, the Committee decided to keep the policy rate unchanged at this
meeting.
Further improvements in the growth outlook were attributed to a more broad-based
expansion in merchandise exports across various product categories and export destinations,
and also driven by the swift recovery in tourism. Private consumption continued to expand
on the back of improvements in farm income. Nevertheless, non-farm income did not gain
much from the export recovery, and thus overall purchasing power had yet to fully recover.
Public expenditure remained an important growth driver. Meanwhile, private investment was
projected to slowly pick up. However, the improved growth outlook was still subject to
external risks. These included sustainability of trading partners’ growth, uncertainties
pertaining to US economic and foreign trade policies, monetary policy directions of major
advanced economies, China’s economic structural reforms, and geopolitical risks.
Furthermore, the Committee would also closely monitor the impacts of tighter regulations on
immigrant labor that were recently announced.
Headline inflation softened mainly due to supply-side factors especially lower fresh
food prices that resulted from this year’s higher agricultural output and last year’s base effects
following the drought, as well as the decline in global oil prices. Meanwhile, demand-pull
inflationary pressures remained low. Nevertheless, headline inflation was projected to slowly
rise in the latter half of the year, supported by supply-side factors and recovery of domestic
demand. The public’s medium-term inflation expectations remained close to the midpoint of
the target.
Overall financial conditions remained accommodative and conducive to economic
growth with ample liquidity in the financial system. Government bond yields and real interest
rates remained low. Meanwhile, business financing through both credit and capital markets
continued to expand. With regard to exchange rates, movements in the baht over the recent
period were in line with regional currencies, and the Committee would continue to monitor
short-term capital flows going forward.
The Committee viewed that financial stability remained sound with sufficient cushion
against economic and financial volatilities on both domestic and external fronts. However,
there remained pockets of risks that warranted close monitoring such as the deterioration in
debt serviceability of small-and-medium sized enterprises (SMEs) which in part reflected
competitiveness issues. Moreover, the search-for-yield behavior in the prolonged low interest
rate environment continued to warrant monitoring as it could lead to underpricing of risks.Looking ahead, Thailand’s growth outlook improved further on the back of external
demand, while domestic demand expansion was not yet sufficiently broad-based. Hence, the
Committee viewed that monetary policy should remain accommodative, and would stand
ready to utilize available policy tools to sustain economic growth while also ensuring financial
stability."www.CentralBankNews.info